Voters, Parties, and the Endogenous Size of Government

Elections, often to a considerable degree, influence the fiscal policies of governments installed on the basis of their results. Yet, economists have tended to view politicians' behaviour either as being determined exogenously or as the result of a social planner's maximisation of a well‐defined social‐welfare function (subject to some appropriate technology and resource constraints). The latter approach— given (i) its inherent abstraction from important politico‐economic interactions, (ii) the theoretical difficulty in deriving a non‐contradictory “collective utility function” (as demonstrated by Arrow), and (iii) the inability to estimate a stable relationship that could explain political preferences with economic variables—is viewed as being an unsatisfactory tool for the joint description of a country's economy and polity. On the basis of explicit micro‐economic foundations and a democratically coordinated decision‐making mechanism over the “optimal” provision of public goods and the corresponding taxes required to finance them, this paper will introduce a simple economic model of politics that subjects individuals to a—two‐tiered—political decision‐making process over party membership and electoral participation, thereby endogenising the evolution of the competing parties' ideologies, households' electoral behaviour, and the key factors explaining the design of fiscal policies. Having the majority party's median delegate determine on the “optimal” degree of income redistribution suggests that a country's wealth distribution is a crucial explanatory variable explaining its politico‐economic development path.